For taxation purposes, cryptocurrencies are regarded as property. As a result, transactions involving cryptocurrencies are exactly like any other investment subject to capital gains tax. This includes trading cryptocurrencies for cash and making purchases with them.
To determine their tax obligations, individuals and companies must maintain complete records of all bitcoin transactions, including dates and prices. There may be fines or other legal repercussions if bitcoin transactions are not reported or gains are not taxed. Does this bring up a crucial query regarding (your) cryptocurrency holdings?
Self-custody wallets and decentralized finance (DeFi) protocols do not guarantee that transactions are completely hidden from tax authorities. Tax authorities have access to technologies and tools that let them monitor transactions on open blockchain networks. widely used for DeFi transactions, similar to Ethereum.
For the purpose of locating and pursuing those who are not disclosing their bitcoin transactions, many tax agencies throughout the world are investing in blockchain analytics tools. Imagine a user trading cryptocurrency for fiat money, or money issued by the government, such as USD, EUR, or GBP. If so, the transactions might need to be reported in accordance with know-your-customer (KYC) and anti-money laundering (AML) laws.
Depending on the regulations in a particular area, this means that a cryptocurrency user is required to declare the transactions to tax authorities. Keep in mind that every cryptocurrency transaction activity is public. On-chain data displays transactions’ activities that were recorded on blockchain networks.
In this context, “on-chain data” refers to information that has been added to a blockchain, a visible record of all network transactions. Data-matching algorithms can be used to examine and link various kinds of information on the blockchain, including ownership of both assets and digital tokens, because the blockchain is a decentralized and unchangeable record of all transactions.
In some circumstances, this on-chain data can be used to determine the owners of cryptocurrency addresses. potentially jeopardizing the confidentiality and anonymity of such people. Users must take reasonable precautions to preserve their privacy in light of the public nature of on-chain data.
